Bank Setoffs and Tax Refund Seizures in Legal Debt Collection
The most common methods of collecting a debt include wage garnishments, property liens, and property levies. Two additional techniques are bank setoffs and tax refund seizures, which apply to specific situations. A bank setoff involves a bank taking money from a consumer’s deposit account to compensate for a loan that the consumer owed to the bank but failed to pay. A tax refund seizure involves the IRS taking money from a refund to cover missed child support payments.
Bank Setoffs
A bank or other financial institution generally has broad authority to impose a setoff on an account, whether this is a checking account, a savings account, or a certificate of deposit. Certain limitations still protect consumers, though. A bank generally cannot apply a setoff to income from government benefits, such as Social Security benefits, Social Security Disability or Supplemental Security Income benefits, or unemployment benefits. It also generally cannot use a bank setoff for credit card payments that the account holder failed to make. A bank can use a setoff in this situation only if the account holder authorized automatic withdrawals from their account for credit card bills.
A bank does have the right to use a setoff against money that is exempt, such as government benefits, if the setoff relates to fees owed on the same account. You can prevent this issue by opening another account and sending government benefits payments and other exempt income to the new account.
You can consult the law in your state to determine whether you may have additional protections against bank setoffs. Some states, such as California, do not allow setoffs in certain situations if the balance in your account with that bank falls below a set amount. In other states, a bank cannot use a setoff based on consumer debt unless the account holder authorizes it or a court orders a setoff.
Tax Refund Seizures
The Financial Management Service in the Department of Treasury will send advance notice of a proposed seizure to a parent who owes child support payments. This gives you time to devise a strategy to minimize the impact on your finances. Also, you can try to limit or prevent a tax refund by changing your withholdings with your employer. This can affect the size of your refund and thus the amount of your loss in a seizure.
If you are married to a spouse who owes child support payments, you may be able to avoid having your tax refund seized by filing a tax return separately from your spouse. You should bear in mind that this strategy may have separate negative consequences, such as missing out on tax exemptions. Another option is to file an Injured Spouse Allocation form when you submit your return or when you receive notice of the proposed seizure. This can allow you to keep your portion of the tax refund if you file taxes jointly with your spouse. Your portion is usually based on the amount that your employer withheld for taxes in the previous year.
While you cannot discharge child support debt in bankruptcy, you may be able to devise a manageable payment plan if you file under Chapter 13. You would need to complete this process within three to five years.
